Tit for Tat

13 May 2019


Cogito Ergo Non Serviam

China Retaliates with Higher Tariffs on $60 Billion of US Goods


Last week, Donald Trump raised tariffs on numerous Chinese goods valued at $200 billion from 10% to 25%. Today, China announced retaliatory tariffs on $60 billion of American goods effective June 1. The Dow Jones Industrial Average is down more than 500 points in the first 20 minutes of trading. Tit-for-tat tariffs are stupid, as are all tariffs save those protecting infant industries. As Gandhi noted, an eye for an eye leaves everyone blind. The policies of Presidents Trump and Xi will make their people poorer. Mr. Xi does not have to worry about re-election. Mr. Trump does. And that will be the decisive factor.

CNBC reported, "Beijing will increase tariffs on more than 5,000 products to as high as 25%, the Chinese Finance Ministry said Monday. Duties on some other goods will increase to 20%. Those rates will rise from either 10% or 5% previously.

"The move follows President Trump's decision to raise duties on $200 billion in Chinese products to 25% from 10%. The world's two largest economies have struggled to ink a trade deal and end a widening trade conflict that threatens to damage the global economy."

The Chinese have engaged in practices that are unfair. The theft of intellectual property that began almost as soon as President Nixon got back to the White House in 1972 needs to end. The property laws that require any foreign investor to take a junior position in partnership with a Chinese operation is out-dated. The legal system in China remains one of happenstance and influence peddling rather than one in which the rule of law prevails. This journal is second to none in its hostility to the general abuse of the Chinese people perpetrated by the Chinese Communist Party.

That said, tariffs are not going to solve these problems. Mr. Trump thinks they are a good way to change the trade battlefield. He has stated that if a country has a trade deficit with another, the first country can easily win a trade war because it has a greater capacity to charge tariffs. He believes that the damage to the trading relationship falls more heavily on the side running the trade surplus.

While this is arithmetically true, it doesn't take into consideration either nation's capacity to endure the pain the tariffs cause. The Chinese workers are not going to the polls any time soon to vote on whether to replace the CCP with another party. They won't get to vote on the administration of President Xi. The Chinese are sitting on a trillion dollars or so worth of US Treasuries they can use to subsidize their suffering businesses.

Meanwhile, the US can print enough money to subsidize the farmers and others who suffer from Mr. Trump's tariffs, but Congress will have to approve the funds. There is a regularly scheduled election in November 2020 that will serve as a referendum on Mr. Trump's first term as president. He might not get another. Even if he wins, there is a strong chance that the Democrats will retain the House and could take over the Senate. That will seriously hamstring his ability to maneuver. Put differently, Mr. Trump has opted to use tariffs to change the nature of the trading relationship, but the Chinese have a greater ability to weather the damage inflicted. In the long run, the US will be the bigger loser.

Trade is a win-win arrangement according to every economist in the post-mercantilist era. While it is true that one side can gain more than the other, both are better off than if they do not trade. That has been demonstrated by the last several decades of economic history. Mr. Trump does not believe the experts and arithmetic are right. Mr. Art-of-the-Deal thinks he can have America win more and China win less through his tariffs.

He is wrong, and in the end, he will have to yield to reality and make a deal with China that provides, at best, a fig leaf to cover the failure of his policy. Until then, everyone is worse off.

© Copyright 2019 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.

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